Financial Reporting Fraud Penalties, And Auditors

The rising tide of corporate scandals and audit failures has shocked the public, and the integrity of auditors is being increasingly questioned. It is crucial for auditors and regulators to understand the main causes of audit failure and devise preventive measures accordingly.This study analyzes enforcement actions issued by the China Securities Regulatory Commission against auditors in respect of fraudulent financial reporting committed by listed companies in China. We find that auditors are more likely to be sanctioned by the regulators for failing to detect and report revenue-related frauds rather than assets-related frauds. Further analysis of the revenue-related frauds indicates that auditors are more likely to be sanctioned if the scale of the accounting firm is small rather than big firms.In sum, our results suggest that regulators believe auditors have the responsibility to detect and report frauds that are egregious, transaction-based, and related to accounting earnings. The results contribute to our knowledge of auditors' responsibilities for detecting frauds as perceived by regulators.